Building with construction loans

SPONSORED - If you're thinking about doing something around your home, in respect to an add-on or maybe a remodel, Pete says, you're going to need a loan. Luis Hernandez and Marty Schroder from Banner Bank join Pete to talk about the ins and outs of borrowing, and paying with, a construction loan.

As the economy changes, particularly with the government slowing their bank bond purchases, Luis says the rates right now are in flux. "On the construction loans, we're on the low-to-mid fives," he says.

If you're thinking about doing an addition, Pete says, you'll be looking at a construction loan. Before walking into the bank to get your loan, Luis says you should first know how much the project is going to cost. "Do you need $10,000? Do you need $300,000? That's going to make a difference," he says. At that point, you should have plans done, and have been receiving estimates for builders.

Before you spend money on plans, however, Marty points out that you should check to make sure it's economically feasible from a qualification standpoint. "I think it's important to do a pre-consultation with a loan officer before you start making plans for a construction project, be it a minor remodel or major addition."

Luis and Marty say a loan officer can walk you through the loan process and ensure there's nothing you're forgetting about, and can make sure the project is financially feasible for your budget. "We can save them a lot of hassle down the road," Marty says, "by pointing out some of the challenges they may encounter in this process.

After procuring a construction loan and embarking on a project, you may be wondering how the loan payout process works.

"Our first step will be to pay off the primary lender," says Marty, which makes them the primary lender. "Then we would hold the funds in a construction draw account. Each month, as construction progresses, the builder and homeowner will get together and evaluate the progress, and then submit a draw request to the bank for that portion of the project that's been done."

This type of payment protects both the homeowner and the bank -- the bank won't pay for a component until it's been installed in the home.

To make sure that the component is actually done, Marty says the first step is for the homeowner and builder to come to an agreement: if the homeowner believes something is not complete enough to warrant payment, they and the builder will first need to come to terms before the bank inspects.

Then, "we hire an outside inspection company," says Marty, "to go out and do the construction inspections for us."

If you have damaged credit, Luis says you should still talk to a loan officer if you're thinking about doing a construction project. He stresses being honest with that officer, so that small surprises don't crop up and hurt the project.